Originally posted at City Watch LA.
By Jack Humphreville.
Mayor Eric Garcetti and the Herb Wesson led City Council of Los Angeles have refused the recognize the severity of the City’s almost $10 billion unfunded pension liability and the impact it will have on the City’s ability to provide core services such as public safety and well maintained streets and sidewalks.
As of June 30, 2013, the City’s two pension funds, the $17 billion Los Angeles City Employees’ Retirement System and the $20 billion Fire and Police Pension Plans, were only 74% funded. As a result, over half of this year’s pension contribution of $950 million (19% of the budget) will help to amortize a small portion of this unfunded pension liability.
Over the next three years, the City’s pension contributions will increase by $250 million (over 25%) to $1.2 billion, representing 23% of the City’s budget. This is after a 150%, $650 million increase during the Villaraigosa era, fueled primarily by a four time, $475 million increase in the contributions to the Fire and Police Pension Plans.
Unfortunately, the unfunded pension liability of $10 billion is significantly understated because it is relies on the overly optimistic investment rate assumption that the two pension plans will have a compounded rate of return on its investment portfolio of 7.75% per year for the next thirty years.
If a more realistic rate of return of 6% were used (as recommended by Warren Buffett and Wilshire Associates), the shortfall would increase 75% to an estimated $17.5 billion, representing a funded ratio of an unsustainable 60%.
To amortize this additional unfunded liability, pension contributions would escalate 50% ($600 million) to about $1.8 billion in three years, chewing up 35% of the General Fund budget and requiring the elimination of many essential services.
City Hall will claim that it has made substantial changes for newly hired civilian and sworn employees that will save billions. However, we have not had the opportunity to review any details that support these claims or any information about the future level of contributions to the pension plans and their impact on the City budget.
To help everybody (including the members of the City Council) understand the demands that the two pension plans will have on the City’s budget, Mayor Garcetti needs to direct the City’s two pension plans to prepare timely (and understandable) reports analyzing their current financial condition, past and future pension contributions by the City, past and future benefits for retirees, the rate of return on invested assets, and the impact of lowering the investment rate assumption to a more realistic 6%.
Mayor Garcetti should also direct the pension plans to prepare an analysis of the cost to achieve 100% funding for each plan within 15 years as outlined in the Pension Reform Act of 2014, the State ballot measure being proposed by Chuck Reed, the Democratic Mayor of San Jose. This analysis would also review the impact of lowering the investment rate assumption to 6% over 15 years.
Since the Little Hoover Commission concluded that underfunded pension plans cannot solve their ever increasing need for cash contributions without addressing future benefits for existing members, the report should also analyze the impact on the City’s budget and pension plans of adjustments to the benefits for current City employees, including, but not limited to, increasing the retirement age, requiring higher employee contributions, lowering the cost of living adjustments, and the elimination of spiking.
If Eric is serious about pension reform, he will endorse Chuck Reed’s Pension Reform Act of 2014. While this endorsement would drive the campaign funding leadership of the City’s unions absolutely ballistic, this measure, if passed by the voters of California, would enhance the City’s ability to address, through collective bargaining process, the ever increasing cash requirements of the City’s two pension plans.
So will Eric confront the severity of the City’s unfunded pension liability and its demands on the City’s budget and its ability to provide essential services? Or will his administration be a continuation of the Villaraigosa era budget games that cater to the campaign funding union leadership of the City’s unions at the expense of all Angelenos?
(Note: The retirement benefits of both the County of Los Angeles ($37 billion) and our Department of Water and Power ($1.8 billion) could also use a little review, analysis, and sunshine.)